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Wall Street Pays for Performance

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As proxy statements continue to roll out from Wall Street's finest we are getting the full picture of just how much those at the top of the Street are padding their bank accounts this year. Lehman Brothers (NYSE: LEH), which just released its proxy today, was the most recent, though proxies from Goldman Sachs (NYSE: GS) and Morgan Stanley (NYSE: MS) are also fairly freshly off the presses.

For Goldman's Lloyd Blankfein, the highest paid of the three, compensation totaled $54.3 million from all sources for 2006. Salary was a paltry $600,000 of the total, while his cash bonus was $27.2 million, restricted stock awards totaled $15.7 million, and the current value of options he received is $10.5 million. Lehman's Richard Fuld took home $40.7 million and Morgan's John Mack pocketed $41.4 million.

Financial services companies are fueled by intellectual capital, and the people in this industry are notorious soldiers of fortune -- i.e. they'll happily work for whoever pays them the most. Wall Street firms also tend to be unabashedly bottom line oriented when it comes to compensation. If the firm does well it's a bonanza for almost everyone, but if times are tough, they're not shy about cutting back hard on compensation.

This is in stark contrast to the "performance based compensation" packages given out to the chiefs in many other industries. Boards of directors in other industries seem reticent to structure performance-based pay packages that are truly linked to any reasonable measure of performance. And if they are, the bar for "outperformance" is set embarrassingly low. In his Who's Filing Now feature, fellow Fool Tim Beyers highlighted the performance-based pay package for I2 Technologies (Nasdaq: ITWO). The fine print in the package gives I2's board free reign to play with the numbers later when determining whether the company met its performance goals. Cute.

With guys like Mike Vick, Alex Rodriguez, and Shaquille O'Neal taking home over $20 million per year (not including endorsements), I find it hard to criticize large CEO paydays when the company is putting up a winning record. The key is that if a company is using performance based compensation, it's important to have a culture where the cash spigot can be easily turned off when performance dries up.